Facing headwinds, Dilma changes course
The government announces plans to privatise infrastructure, and disappoints striking bureaucrats
Aug 18th 2012 | SÃO PAULO | from the print edition
IN RECENT years Brazil’s government has been able to avoid tough spending choices. Faster economic growth and falling tax evasion have translated into steadily rising revenues, allowing the federal government to hire more workers and pay them more, as well as to boost pensions and social transfers (see chart 1). But the fat times are over. In 2011 economic growth was only 2.7%; this year 2% looks optimistic. Tax revenues are rising only a little faster than inflation. The government can no longer satisfy everyone.
The noisiest demands come from public-sector workers. Teachers at federal universities have been on strike for three months; they have recently been joined by federal police, tax officials and staff at some regulatory agencies. Around 300,000 have walked out, almost half the federal workforce. Police have blocked roads and worked to rule at airports, causing travel chaos. Striking customs officials have left goods stuck in ports. The strikers’ demands would swell the federal government’s salary bill by up to 50%; inflation is running at 5.2%.
The president, Dilma Rousseff, has made clear her irritation. Most federal employees have had big pay increases since 2003, when her Workers’ Party (PT) came to power. On average, federal salaries are now around double the private-sector rate for equivalent jobs, points out Raul Velloso, a public-finance specialist in Brasília.
Ms Rousseff has said that any pay rises will be limited to the lowest paid, or tied to productivity—and that public money would be better directed to helping private companies avoid lay-offs. Strikers have been threatened with docked pay and state governments authorised to use their own staff as cover. All this marks a big shift: the strikes are being led by the Central Única dos Trabalhadores, a powerful group of unions with strong links to the PT.
Even if the president wins this battle of wills, it has already disrupted her plans. For months officials have been promising new measures to boost growth by cutting the custo Brasil, as the fearsome cost of doing business in the country is known. To turn an honest centavo, businesses must cope with awful roads, high energy costs, archaic labour laws and a Byzantine bureaucracy. But announcements were postponed as the government reworked its sums to find some crumbs for the strikers.
On August 15th, before an audience of business leaders at the presidential palace, Ms Rousseff unveiled plans for auctions to bring private firms into building and running infrastructure. Investors will be invited to build or upgrade and then operate toll roads totalling 7,500km (4,700 miles) and railways covering 10,000km. Investment will total some 133 billion reais ($66 billion), the government estimates, with almost half spent in the next five years. The auctions will start early next year. Among the projects to be handed over are some from the government’s flagship Growth Acceleration Programme (PAC) of hitherto public investment. Contracts for ports and airports will follow. Partnership with the private sector was the “thriftiest” approach, said the president: “We want better infrastructure to cut costs for businesses and taxpayers, and most of all to ensure more and better-paying jobs.”
Brazil’s trade surplus relies on shipping out mountains of soya beans, iron ore and such like—the stuff is mostly moved along bumpy roads to antiquated, badly run ports, only to sit idle before loading, sometimes for weeks. Air passenger numbers have doubled in the past decade and are expected to do so again in the next. The country’s rail network is an eighth the size of that in the United States, and much of it is in terrible condition. Although federal spending on infrastructure has risen recently, excluding housing it is still only 1.1% of GDP.
Ms Rousseff, like her party, is instinctively hostile to anything akin to privatisation. But she has clearly concluded that without private-sector involvement, the infrastructure Brazil needs will never be built. Clearing such a backlog would strain any government—and in Brazil, where current spending has long crowded out investment, it is simply impossible. To make matters worse, around two-thirds of federal spending goes on pensions or other non-discretionary items, points out Mr Velloso (see chart 2). And even when the cash is there, an incompetent public sector often cannot get projects off the drawing board. Infraero, the state firm that mismanages Brazil’s airports, often fails to carry out budgeted improvements. Many PAC projects are running years behind schedule.
A policy shift away from short-term boosts to demand towards ambitious infrastructure upgrades should increase Brazil’s long-term growth, says Gray Newman of Morgan Stanley, an investment bank. But bringing in private firms cannot turn things around immediately. Cumbersome and illogical planning and environmental laws often halt infrastructure projects for months—or for ever. This week a federal court ordered a halt to work on Belo Monte, a controversial hydroelectric scheme in the Amazon, for example. And contracting out can work only if the PT overcomes its distaste for decent private profits: the many risks in project-execution mean that otherwise investors will stay away.
The other half of the government’s promised attack on the custo Brasil—modest but broad-based tax cuts—has still not been confirmed. It has hinted that a cut in payroll taxes granted last year to sectors heavily exposed to foreign competition, such as shoes and software, may be extended to all employers. Three or four of the 28 taxes on electricity could also be abolished, reducing some of the world’s highest bills by 10-20%.
Both moves would benefit consumers and cut business costs across the economy. They would also signal a change of direction: previous tax cuts have been narrow and temporary. But budgetary pressures may mean that they are watered down or further delayed. Brazilian business must hope Ms Rousseff holds her nerve.
Correction: This article originally mistakenly referred to Brazil’s current-account surplus. Brazil runs a trade surplus, not a current-account surplus. This was corrected on August 17th.